SPECIAL FEATURE: What globalism is doing to 'Middle America'

News Weekly, October 28, 2006

Paul Roberts was an Assistant Secretary of Treasury in the Reagan Administration. His impeccable economic credentials give particular force to his recent observations on the deindustrialisation of America, and his conviction that the continued export of jobs by corporate America will have disastrous consequences for his country.

Paul Roberts said that the export of jobs is having devastating consequences for American society: "The ladders of upward mobility are being dismantled. America, the land of opportunity, is giving way to ever deepening polarization between rich and poor."

Since the days of President Franklin D. Roosevelt in the 1930s the U.S. government has sought to protect employment of its citizens. However, in recent years, the off-shoring of American jobs is eroding the living standards of Americans.

In times past, first world workers had nothing to fear from cheap labour abroad. Americans worked with superior capital, technology and business organisation.

This made Americans far more productive than Indians and Chinese, and, as it was not possible for U.S. firms to substitute cheaper foreign labour for U.S. labor, American jobs and living standards were not threatened by low wages abroad or by the products that these low wages produced.

High technology

Roberts said the advent of off-shoring has made it possible for U.S. firms to produce quality goods and services for the U.S. market with foreign labor. This new development allows cheap foreign labour to work with the same capital, technology and business know-how as U.S. workers. The foreign workers are now as productive as Americans, with the difference being that the large excess supply of labour that overhangs labour markets in China and India keeps wages in these countries low.

Labour that is equally productive but paid a fraction of the wage is a magnet for Western capital and technology.

Although off-shoring is destroying entire industries, occupations and communities in the United States, the devastation of U.S. manufacturing employment was waved away with promises that a "new economy" based on high-tech knowledge jobs would take its place. Education and retraining were touted as the answer.

"In testimony before the U.S.-China Commission," he said, "I explained that off-shoring is the replacement of U.S. labor with foreign labor in U.S. production functions over a wide range of tradable goods and services."

Tradable goods and services are those that can be exported or that are competitive with imports. Non-tradable goods and services are those that only have domestic markets and no import competition. For example, barbers and dentists offer non-tradable services. Examples of non-tradable goods are perishable, locally produced fruits and vegetables and specially fabricated parts of local machine shops.

He added, "As the production of most tradable goods and services can be moved offshore, there are no replacement occupations for which to train except in domestic 'hands on' services such as barbers, manicurists, and hospital orderlies.

"No country benefits from trading its professional jobs, such as engineering, for domestic service jobs."

Third World country

At a Brookings Institution conference in Washington in January 2004, he predicted that if the pace of jobs out-sourcing and occupational destruction continued, the U.S. would be a Third World country in 20 years.

Most economists, however, insisted that off-shoring is a manifestation of free trade and would only have positive benefits overall for Americans.

"Reality has contradicted the glib economists. The new high-tech knowledge jobs are being out-sourced abroad even faster than the old manufacturing jobs. Establishment economists are beginning to see the light," he said.

Princeton economist and former Federal Reserve vice chairman Alan Blinder concludes that economists who insist that offshore out-sourcing is merely a routine extension of international trade are overlooking a major transformation with significant consequences. Blinder estimates that between 42 and 56 million American service sector jobs are susceptible to offshore out-sourcing. Whether all these jobs leave or not, U.S. salaries will be forced down by the willingness of foreigners to do the work for less. (Foreign Affairs, March/April 2006)

Software engineers and information technology workers have been especially hard hit. Jobs off-shoring, which began with call centres and back-office operations, is rapidly moving up the value chain.

Lower pay

Business Week's Michael Mandel compared starting salaries in 2005 with those in 2001. He found a 12.7 per cent decline in computer science pay, a 12 per cent decline in computer engineering pay, and a 10.2 per cent decline in electrical engineering pay. Marketing salaries experienced a 6.5 per cent decline, and business administration salaries fell 5.7 per cent.

Using the same sources as the Business Week article, Professor Norm Matloff, at the University of California, made the same comparison for master's degree graduates. He found that between 2001 and 2005 starting pay for master's degrees in computer science, computer engineering, and electrical engineering fell 6.6 per cent, 13.7 per cent, and 9.4 per cent respectively.

On February 22, 2006, CNNMoney.com staff writer Shaheen Pasha reported that America's large financial institutions are moving "large portions of their investment banking operations abroad." Off-shoring is now taking American jobs in research and analytic operations, foreign exchange trades, and highly complicated credit derivatives contracts.

Deloitte Touche says that the financial services industry will move 20 per cent of its total costs base offshore by the end of 2010. As the costs are lower in India, the move will represent more than 20 per cent of the business. A job on Wall Street is a declining option for bright young persons with high stress tolerance as America's last remaining advantage is out-sourced.

According to Norm Augustine, former CEO of Lockheed Martin, even McDonald's jobs are on the way offshore. Augustine reports that McDonald's is experimenting with replacing error-prone order takers with a system that transmits orders via satellite to a central location and from there to the person preparing the order. The technology lets the orders be taken in India or China at costs below the U.S. minimum wage and without the liabilities of U.S. employees.

American economists, some from incompetence and some from being bought and paid for, described globalisation as a "win-win" development. It was supposed to work like this: the U.S. would lose market share in tradable manufactured goods and make up the job and economic loss with highly educated knowledge workers. The win for America would be lower-priced manufactured goods and a white-collar work force. The win for China would be manufacturing jobs that would bring economic development to that country.

It did not work out this way, as Morgan Stanley's Stephen Roach recently admitted. It has become apparent that job creation and real wages in the developed economies are seriously lagging behind their historical norms as offshore out-sourcing displaces the "new economy" jobs in "software programming, engineering, design, and the medical profession, as well as a broad array of professionals in the legal, accounting, actuarial, consulting, and financial services industries".

Labour downshift

The real state of the U.S. job market is revealed by a Chicago Sun-Times report on January 26, 2006, that 25,000 people applied for 325 jobs at a new Chicago Wal-Mart.

According to the official payroll jobs data, over the past half-decade, the U.S. economy created 1,050,000 net new private sector jobs and 1,009,000 net new government jobs for a total five-year figure of 2,059,000. That is seven million jobs short of keeping up with population growth.

This jobs data contradict the hype from business organisations, such as the U.S. Chamber of Commerce, that offshore out-sourcing is good for America.

Large corporations, which have individually dismissed thousands of their U.S. employees and replaced them with foreigners, claim that jobs out-sourcing allows them to save money that can be used to hire more Americans.

The corporations and the business organisations are very successful in placing this disinformation in the media. The lie is repeated everywhere and has become a mantra among no-think economists and politicians. No sign of these jobs can be found in the payroll data and there is abundant evidence of employment loss.

From 2001 to 2006, the IT sector of the U.S. economy lost 644,000 jobs, or 17.4 per cent of its work force. Computer systems design and related work lost 105,000 jobs, or 8.5 per cent of its work force. Clearly, jobs off-shoring is not creating jobs in computers and information technology. Indeed, jobs off-shoring is not even creating jobs in related fields.

U.S. manufacturing lost 2.9 million jobs, almost 17 per cent of the manufacturing work force. The wipe-out is across the board. Not a single manufacturing payroll classification increased over the period.

The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a "super-economy" that is "the envy of the world." In five years, communications equipment lost 42 per cent of its work force. Semiconductors and electronic components lost 37 per cent of its work force. The work force in computers and electronic products declined 30 per cent. Electrical equipment and appliances lost 25 per cent of its employees. The work force in motor vehicles and parts declined 12 per cent. Furniture and related products lost 17 per cent.

Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43 per cent. Paper and paper products lost one-fifth of their jobs. The work force in plastics and rubber products declined by 15 per cent.

Service industries

For the five-year period, U.S. job growth was limited to four areas: education and health services, state and local government, leisure and hospitality, and financial services. There was no U.S. job growth outside these four areas of domestic non-tradable services.

One of America's largest IT corporations, Oracle, has been downsizing in America but recently announced two thousand more jobs being offered in India. How is Oracle's move of U.S. jobs to India creating American jobs in non-tradable services such as waitresses and bartenders, hospital orderlies, state and local government, and credit agencies?

Engineering jobs in general are in decline, because the manufacturing sectors that employ engineers are in decline.

During the last five years, the U.S. work force lost 1.2 million jobs in the manufacture of machinery, computers, electronics, semiconductors, communication equipment, electrical equipment, motor vehicles, and transportation equipment. The official payroll jobs numbers show a total of 69,000 jobs created in all fields of architecture and engineering, including clerical personnel, over the past five years. That comes to a mere 14,000 jobs per year (including clerical workers). What is the annual graduating class in engineering and architecture? How is there a shortage of engineers when there are more graduates than can be employed?

Occasionally, real information escapes the spin machine. In February 2006 the National Association of Manufacturers, one of off-shoring's greatest supporters, released a report, "U.S. Manufacturing Innovation at Risk," by economists Joel Popkin and Kathryn Kobe.

Overseas investment

The economists said that U.S. industry's investment in research and development is not languishing after all. It just appears to be languishing, because it is rapidly being shifted overseas: "Funds provided for foreign-performed R&D have grown by almost 73 per cent between 1999 and 2003, with a 36 per cent increase in the number of firms funding foreign R&D."

U.S. industry is still investing in R&D after all; it is just not hiring Americans to do the research and development. U.S. manufacturers still make things, only less and less in America with American labor. U.S. manufacturers still hire engineers, only they are foreigners, not Americans.

In other words, everything is fine for U.S. manufacturers. It is just their former American work force that is in the doldrums. As these Americans happen to be customers for U.S. manufacturers, U.S. brand names will gradually lose their U.S. market. U.S. household median income has fallen for the past five years. Consumer demand has been kept alive by consumers' spending their savings and home equity and going deeper into debt. It is not possible for debt to imperpetuity rise faster than income.

Said Paul Roberts, "The United States is the first country in history to destroy the prospects and living standards of its labor force. It is amazing to watch freedom-loving libertarians and free-market economists serve as apologists for the dismantling of the ladders of upward mobility that made the America of old an opportunity society.

"America is seeing a widening polarisation into rich and poor. The resulting political instability and social strife will be terrible," he concluded.